The construction giant’s bout of Australian troubles will be familiar to many other contractors
First the good news: the overall construction, services and PFI group will beat analysts’ expectations for profits in 2013. Now the bad news: a bigger than expected (£34m rather than £24m) dent to those profits from Australian operations (due to falling volumes and deteriorating prices) will only be offset by greater than expected receipts for sales of PFI equity stakes and next year the group’s Antipodean operations will experience continuing difficulties.
The European construction groups’ travails remind me of a recent “Colemanball” from a Radio 5 Live football commentator, “once again and not for the first time”. Groups from the northern hemisphere with Australian interests have, for as long as I remember, been taken for a roller coaster ride by their Aussie cousins. A typical pattern is seven or so years of plenty before the earnings famine strikes, not only at an economic level but, more worryingly, at a systemic, operational level.
The construction market and wider economy is like Henry Wadsworth Longfellow’s Little Girl: when it is good it is very good indeed, but when it is bad it is horrid.
Mowlem, Laing O’Rourke, Bilfinger Berger and Hochtief are among the groups that have exemplified this pattern. Why? One reason is the construction market and wider economy is like Henry Wadsworth Longfellow’s Little Girl: when it is good it is very good indeed, but when it is bad it is horrid. The economy is hugely geared to natural resources and has generated even more wild swings in commercial and residential activity and values.
Another factor, though, supposedly more under the control of the groups, is their own management of their subsidiaries, particularly regarding contractual controls or legal disputes. The naughty child analogy again emerges. And - how shall we put it? - the more strident aspects of the Australian persona. The German for subsidiary is tochter, literally “daughter”. An exasperated contact once conveyed to me the following in clipped Teutonic tones after another black hole had been uncovered: “Zhey [the Australian management] started acting like a teenage daughter. Zhey vanted to do everyzhing zheir own vay.”
A common feature in all the cases I can recall has been a combination of cost controls becoming lax during booms and legal disputes, often due to poorly written contracts.
Taking local management at their word has not always been advisable. And being half a dozen time zones away is a significant handicap. It can take a whole week of toing and frowing by phone or email before European central command actually gets something approaching a realistic picture. And then it takes two days of organisation, flying and jet lag to get senior management to the other side of the world, by which time the locals may have dug themselves into an even bigger hole.
Balfour has a good record of tackling problem overseas divisions, albeit often taking a few years. Others have not been so hands on. One senior director sheepishly conceded to me many years ago that his company had taken what amounted to a “don’t ask, don’t tell” approach: “they were so good for so long, we stopped looking”.
Alastair Stewart is construction and housing analyst at Progressive Research. Follow him on Twitter @BuildInsight